Pop quiz! If I asked you, "Who invented the index fund?" what would your answer be? I'll bet most of you don't know and don't care. But those who do care would probably answer, "John Bogle, founder of The Vanguard Group." And that's what I would have answered too until a few weeks ago.
But, it turns out, this answer is false.
Yes, Bogle founded the first publicly-available index fund. And yes, Bogle is responsible for popularizing and promoting index funds as the "common sense" investment answer for the average person. For this, he deserves much praise.
But Bogle did not invent index funds. In fact, for a long time he was opposed to the very idea of them!
Recently, while writing the investing lesson for my upcoming Audible course about the basics of financial independence, I found myself deep down a rabbit hole. What started as a simple Google search to verify that Bogle was indeed the creator of index funds led me to a "secret history" of which I'd been completely unaware.
In this article, I've done my best to assemble the bits and pieces I discovered while tracking down the origins of index funds. I'm sure I've made some mistakes here. (If you spot an error or know of additional info that should be included, drop me a line.)
Here then, is a brief history of index funds.
What's the best long-term investment? Because you're a money nerd (and a GRS reader), I hope your answer to this question was, "Stocks!" If the future is anything like the past, that's the correct answer. History has shown that stocks are the best long-term investment -- and by a wide margin.
Unfortunately, most Americans believe otherwise.
As a part of its annual Economy and Personal Finance survey (conducted during the first two weeks of April), Gallup News asked 1017 American adults, "Which of the following do you think is the best long-term investment: bonds, real estate, savings accounts or CDs, stocks or mutual funds, or gold?"
- 35% of respondents said that real estate is the best-long term investment
- 21% said that stocks or mutual funds are the best long-term investment
- 17% said that savings accounts or certificates of deposit are the best long-term investment
- 16% said gold is the best long-term investment
- 8% said bonds are the best long-term investment
While acknowledging that past results are no guarantee of future performance -- let's take a look at why I think Americans haven't got a clue when it comes to figuring out the best long-term investment strategy.
The Rate of Return on Everything
The August 2019 issue of The Quarterly Journal of Economics included a paper entitled "The Rate of Return on Everything, 1870-2015". Over an astounding 74 pages of discussion, the authors attempt to analyze the long-term (145-year) rate of return on a variety of assets around the world.
The paper examines four popular investment vehicles:
- Bills, by which the authors mean Treasury bills, are short-term government bonds. At present, these are a good proxy for the rates you can earn with a high-yield savings account. (I don't think this is always the case, though.)
- Bonds, which in this case refers to ten-year government bonds (such as a 10-year Treasury note).
- Equity, which is another way to describe common stock. Here, the authors are measuring overall stock market performance.
- Housing, including rental properties.
We'll look at each of these in greater detail in a moment (and we'll look at gold too), but for now let's look at this paper's overall findings. While the authors looked at data for many countries, I'm only going to share results for the U.S. The following table shows the rates of return for these different asset classes over three different time periods. (Remember that, for our purposes, Bills are a stand-in for savings accounts.)
From this table, it's clear that equities (i.e., stocks) have been the highest return investments over long periods of time. Nothing else comes close. (Outside the U.S., this isn't always true.)
Now, while stocks provide the best long-term returns, they also come with the greatest volatility. Here's a a chart (Figure VII) from the paper that shows just how crazy the ride with stocks can be. (Also note how closely equities and real estate tracked each other until the Great Depression.)
It's this volatility that scares so many people away from the stock market. They're afraid that a sharp decline can come at any time. And that's true. But what's also true is that a prolonged bull market can occur at anytime, as we experienced from March 2009 to February 2020! If you're a long-term investor, you don't give a fig about short-term market movement.
Let's dive deeper into the long-term investment returns provided by the asset classes in the Gallup poll: real estate, stocks, savings accounts, gold, and bonds.
Over the past month, I've read a lot of articles about the virtues of investing in gold. Especially in Facebook forums, there's a lot of talk about how gold makes a great long-term investment. (Fortunately, I haven't seen any comments like this in the GRS community on Facebook.)
Whenever the economy gets turbulent, the goldbugs come out in force. They shout from the hilltops that the world is doomed and that the only safe haven is gold. And I'll admit, their arguments can sound pretty convincing.
When I started this site in 2006, I felt unqualified to comment on gold. I hadn't read much about it, and I didn't feel educated enough to offer an opinion. That's changed.
Now, after fifteen years of reading and writing about money, I know enough about economic history and I know enough about gold as an investment to have what I believe is a (somewhat) educated response to this subject. And that response is this: Gold makes a lousy long-term investment.
Today, let's have a discussion about the pros and cons of investing in gold while using my own opinion as a starting point. (And note that this article contains my opinion. It's backed up by some facts, but it's still my opinion. Don't take everything that follows as gospel.)
Put simply: I'm not a fan of precious metals. I have 0% of my investment dollars in gold and silver, and I expect that to hold true for the foreseeable future. It's my opinion that gold is a bad investment right now. Let me explain my reasoning.
Before we dive into the meat of this article, it's important to understand that I'm not an economist, and I'm not a gold expert. But for the past fifteen years, I've made a career out of personal finance, and gold is one tiny part of that subject. The core of this article was originally published here on 10 May 2011, the last time the goldbugs were out in force. This update contains substantial revisions. Also, please note that many of the comments on this article are from its original publication in 2011.
What made you stop planning/researching financial independence and actually start?
Was there a tipping point for you where you finally felt ready to start your FI journey? What made you finally take the plunge, open that first IRA/brokerage account/etc., and throw your money into the market?
I'm waffling over details, though...and can't seem to just DO IT.
This question seems innocuous, right? Yet, I've been thinking about it for the past 24 hours.
I hear questions like this relatively often. People want to know how to get started with saving and investing. Or with debt reduction. Or they want to know how to get started with budgeting. And, in fact, it's the sort of question I had too back when I started my own journey away from debt and toward financial freedom. It all seems so overwhelming! Where do you begin?
Trust me, I know how easy it is to over-complicate things. My ex-wife used to call me Overanalytical Man due to my superhuman ability to overthink even the simplest subject. Although I do this less often (and less severely) than I used to, it's still a problem that plagues me.
Today, let's talk about what I've learned about how to get started with difficult tasks.
Every Monday morning, Tom and I have a Zoom call to discuss the coming week's priorities for this site. For the past couple of months, we've been focused on behind-the-scenes stuff as we prepared to launch the redesign. (That, and I was working on my course for Audible.) Now that the redesign is (mostly) finished, we've begun talking about content. What sorts of articles do we want to write in coming weeks?
"You know," Tom said this morning, "it wouldn't kill you to write about the financial tools you use. You love your credit card, right? And you use Personal Capital? If you were to write about this stuff, we could make more money."
As I've mentioned many times, Get Rich Slowly earns little compared to other sites its size -- especially other financial sites its size. Expected earnings for GRS are probably on the order of $20,000 per month; we bring in about $5000. (And right now, because of the coronavirus, our revenue is lower than this even.)
Hey, friends. Some good news!
First up, I finished my "intro to FIRE" course course for Audible and turned in the manuscript. Once the script is approved, I'll head to the recording studio. Not sure about any projected release date, but we're moving along.
At the same time, it looks like development on the brand-new Get Rich Slowly site design is done. Well, mostly so. There are still a handful of tweaks we'd like to make — but we'd like to do them after the new site is public. To that end, we intend to push the new design live in the next 24 hours or so. This shouldn't cause any hassles...but you never know. Continue reading...
After nearly three weeks of hiatus, it's time to get things back to normal around this joint! Has anything happened while I was away?
Happy birthday to me!
Today, I turn fifty-one. Holy cats, that's old! It's also a very, very strange time in this world. Kim and I had planned to celebrate by spending the weekend with my brother somewhere else in Oregon. With the coronavirus crisis in full swing, that's not going to happen. Oregonians have been ordered to stay at home with family unless absolutely necessary. So, we'll celebrate today with the dog and cats.
As I do every year here at Get Rich Slowly, I'm going to commemorate my birthday by sharing some of the most important things I've learned during my time on Earth. These are the core pieces of my life philosophy.
I'm no wiser or smarter than anybody else. And I'm certainly no better. But I am an individual. I'm my own person with my own personal preferences and personal experiences. These have all jumbled together over the past fifty years to give me a unique perspective on life (just as you have a unique perspective on life). To quote my favorite poem:
Much have I seen and known; cities of men
And manners, climates, councils, governments,
Myself not least, but honour'd of them all;
And drunk delight of battle with my peers,
Far on the ringing plains of windy Troy.
I am a part of all that I have met...
So, these fifty-one nuggets of wisdom are things I've found to be true for me -- and, I believe, for most other people. (But each of us is different. What works for me may not work for you.) These beliefs make up the core of my personal philosophy of life.
For obvious reasons, some of these notions overlap with the core tenets of the Get Rich Slowly philosophy. Plus, long-time readers will recognize this as an article I update every year on my birthday.
Some of these ideas are original to me. Some aren't. When I've borrowed something, I've done my best to cite my source. (And I've tried to cite the oldest source I can find. Lots of folks borrow ideas from each other. There's nothing new under the sun and all that.)
Here are fifty-one principles I've found to be true during my fifty-one years on this planet. I'll lead with this year's new addition.
- Love yourself. All my life, I've struggled with low self-esteem. There have been times when I've hated myself. Last year was especially tough for me as anxiety and depression proved to be crippling for several months. Working with a therapist has helped. She's helped me to understand that it's important to learn to both accept myself and love myself — even though, like everyone, I'm imperfect. I still have a long way to go, but I'm making progress.
- Self-care comes first. If you're not healthy, it's tough to be happy. Before you can take care of your friends and your family, you need to take care of yourself. Eat well. Exercise. Nurture your mind, body, and spirit. Your body is a temple; treat it like one. If you don't have your health, you've got nothing.
- You get what you give. Your outer life is a reflection of your inner life. If you think the world is a shitty place, the world is going to be a shitty place. If you think people are out to get you, people will be out to get you. But if you believe people are basically good, you'll find that this is true wherever you go.
- Life is like a lottery. You receive tickets every time you try new things and meet new people. Most of these lottery tickets won't have a pay-out, and that's okay. But every now and then, you'll hit the jackpot. The more you play -- the more you say "yes" to new friends and new experiences -- the more often you'll win. You can't win if you don't play. That said, however...
- Luck is no accident. What we think of as luck has almost nothing to do with randomness and almost everything to do with attitude. Lucky people watch for -- and take advantage of -- opportunities. They listen to their hunches. They know how to "fail forward", making good out of bad. [Via the book Luck is No Accident.]
- Don't try to change others. "Attempts to change others are rarely successful, and even then are probably not completely satisfying," Harry Browne wrote in How I Found Freedom in an Unfree World. "To accept others as they are doesn't mean you have to give into them or put up with them. You are sovereign. You own your own world. You can choose...There are millions of people out there in the world; you have a lot more to choose from than just what you see in front of you now."
- Don't allow others to try to change you. Again from How I Found Freedom in an Unfree World: "You are free to live your life as you want...The demands and wishes of others don't control your life. You do. You make the decisions...There are thousands of people who wouldn't demand that you bend yourself out of shape to please them. There are people who will want you to be yourself, people who see things as you do, people who want the same things you want. Why should you have to waste your life in a futile effort to please those with whom you aren't compatible?"
- Be impeccable with your word. Be honest -- with yourself and others. If you promise to do something, do it. When somebody asks you a question, tell the truth. Practice what you preach. Avoid gossip. [This is directly from Don Miguel's The Four Agreements.]
- Don't take things personally. When people criticize you and your actions, it's not about you -- it's about them. They can't know what it's like to be you and live your life. When you take things personally, you're allowing others to control your life and your happiness. Heed the Arab proverb: "The dogs bark but the caravan moves on." [Also one of The Four Agreements.]
- Don't make assumptions. The flip side of not taking things personally is to not assume you know what's going on in other people's heads. Don't assume you know the motivations for their actions. Just as their reality doesn't reflect your reality, your life is not theirs. Give people the benefit of the doubt. [Another of The Four Agreements.]
True story: Before Kim and I moved to our current country cottage, the dog park near our home had a homeless problem. (And still does.) We early-morning walkers did our best to clean up camps when they were vacated, but it was a never-ending task. Once, I joined a new woman for a stroll down the trail. "Look at that couple," she said, pointing to a man and a woman who were dragging a tarp down the hillside. "They just woke up and are packing up their camp." I tried to tell her that no, they were regular dog-walkers who were pitching in to clean things up. She didn't believe me. "I'm going to report them," she said. Classic example of a faulty assumption.
Believe it or not, the current coronavirus crisis is affecting Get Rich Slowly too. Things are slow around here. Traffic is down. Revenue is down. Production is down. Plus, I have a big deadline at the end of the month. My project for Audible and The Great Courses is due on March 31st.
So, just like the rest of the world, we're going to press "pause" for a couple of weeks. I will return next Wednesday with my annual birthday article, but you'll have to scroll down to see it. I'm going to pin this post to the top of the front page.
The break will allow me to focus my full attention on the FIRE course. Meanwhile, my partner Tom can work on behind-the-scenes stuff (including the nearly-completed site redesign!) without worrying that I'll mess things up haha. And, best of all, maybe we can get ahead on our publication schedule for once. We have two new staff writers. I have some articles planned. Tom has some articles planned. It would be great to resume in a couple of weeks with a backlog of material!
"What a crazy day," Kim said yesterday after she got home from work.
"Coronavirus?" I asked.
"Yeah," she said. "My schedule fell apart, which I figured it would. But I did see three patients in the morning. All three were doctors. Obviously, they thought it was safe to see the dentist. A lot of others stayed home though. Staff too. Meanwhile, people are pissed."
"What do you mean?" I asked.
"Well, it looks like our practice is going to have to shut down for a while. The Oregon Dental Association sent everyone a letter today that explained we're in high-risk professions. They recommended shutting down except for emergency procedures, except for cases that involve pain. So, our office is probably going to close for a while, and that means nobody's going to get paid."
"That makes sense," I said.
"It does," Kim agreed, "but people aren't happy about it. Some of the people in the office need each paycheck. They can't pay their bills if they don't get paid. They think the dentist should keep paying them -- out of his own pocket, if necessary."
"Whoa!" I said.
"I know," Kim said. "They don't understand that if we don't see patients, the practice doesn't make money. And if the practice doesn't make money, it can't pay employees. They just figure dentists are rich, so he should be able to pay us anyhow."
Naturally, this will have a ripple effect.
- Fewer people are going to the dentist (and the O.D.A. has recommended closing anyhow), so the practice isn't making money.
- The practice isn't making money, so it can't pay employees.
- Employees aren't being paid, so they can't buy things. Some can't even pay their bills.
- And, of course, the businesses that rely on payment from the employees then lose revenue -- and cannot pay their employees.
This morning in The New York Times, Neil Irwin calls this the one simple idea that explains why the economy is in great danger. "One person’s spending is another person’s income," he writes. "That, in a single sentence, is what the $87 trillion global economy is."
It's as if the global economy is a perpetual motion machine. It's a virtuous cycle. I buy from you. You buy from Jim. Jim buys from Jane. Jane buys from me. In a very real way, money makes the world go round.
When money stops changing hands, the world stops spinning. Markets crash. People panic. It's as if we've stopped the motor of the world.